“The hands-on approach must be transformed into a system work style.”

– There is a widespread opinion among the experts that in recent years the city administration has been too deeply immersed in monitoring large strategic projects in the “hands-on mode” instead of focusing on creating a favorable business environment for all market players. How will CISP change its approach to investment activity?

– Introduction of standard procedures for interaction with the city’s new partners and a clear definition of investorbacking moves ought to be our top priority. In other words, a “hands-on” work style must transform into a systems approach to a wide array of large and medium-scale projects (worth dozens million of US dollars). We’ll certainly prioritize such projects and give preference to those that are most relevant for the city – above all, to infrastructural projects. This work style should not only spread to PPP projects, but also to those realized by private investors independently. We should create favorable conditions for investors whereby they will no longer have to raise 54 consents for putting their objects into operation. The investment climate and competition existing between megacities is the key factor of our city's ongoing development. It is therefore extremely important to keep pace with the global trends in decision-making related to investment activity.

The approval procedure should certainly be streamlined, if we want to create a comfortable business milieu. We’ve already held a number of meetings with other construction and property management committees to identify explicitly superfluous consents and streamline decision-making in the area of construction, ownership registration and business starting and running. We have concrete proposals, including amendments to the local and national legislation. Their implementation could reduce the number of coordination procedures by two or three times and also shorten the time needed for getting approvals. Hopefully already this spring we’ll arrive at a positive result in the form of the list of measures and the time of refining the legal framework.

Yet first and foremost we want to create an information medium that would allow investors to adequately assess their potential before entering the city market and to forecast the prospects and risks existing in any particular sector. Some parameters of the investment climate are perceived by business as key ones. We plan on creating a constantly upgraded city portal and concentrating the data currently scattered between various resources at this site. This will help investors assess how open our city really is. They’ll be able to find versatile information there – on the city’s GRP, the level of taxes, coordination procedures, unemployment, Master Plan, land use and development rules, access by transport, real estate market, hospitality services etc. This resource will be geared towards investors, consultancies and rating agencies, which often rely on untrustworthy and incorrect sources of information or hire unprofessional experts.

– Will the local tax system become more liberal?

– In my opinion, the system of tax privileges is rather well developed and structured. As regards the tax rates, the city cannot afford to lower them endlessly, though we’ll obviously insist on relieving the tax burden on hotels. In many countries it was the tax deductions for hotels that marked the first step in supporting the tourist industry. The problem is, however, that not all investors understand how to use the available array of tax preferences. Consultancies and law firms could lend a helping hand to investors by explaining to them the municipal legislation as far as tax privileges are concerned. My judgment is based on my personal experience in a law firm. Thus developers are often unaware that they could be eligible to property tax deductions (50%), once they turn their projects over for operation in the year of obtaining their construction permit. Another interesting way of saving on taxes for investors is transferring their property to mutual investment funds as a contribution. In other words, there is an array of little-known mechanisms which the investor neglects only because the corporate management do not aim at considering all possible ways of tax optimization stipulated in St. Petersburg’s legislation.



– This spring the city government will certainly consider the amendments called to make our law more convenient for medium and even small-scale PPP projects. In particular, we are going to streamline the competitive selection procedures and provide a possibility of prequalification at one time with submitting an application for a tender (rather than sequentially).

Another important amendment is that tenders on PPP projects will be held concurrently with the auction sale of the land plots whereon such projects are going to be realized. Such tenders will be organized by CISP or Saint Petersburg Property Fund with regard for the rules stipulated in the Russian Land Code. To date different rules have been applied to plots of land, on one hand, and to PPP projects, on the other hand, and we can provide the winner of a PPP tender with requisite land only through a target allocation procedure. Yet increasingly often the target allocation of land is impossible, once the territorial layout plan has already been approved. Meanwhile, investors badly need land allocation warrants from the city immediately after they win a tender. The new edition of this law says that winners of PPP tenders may immediately obtain a development spot.

– Have you already defined priorities for sorting out mini PPP projects?

– First of all, these are projects improving the urban infrastructure and creating a more comfortable dwelling environment. This is not talking about supporting a certain project of residential development, but rather about creating social, transport or health-care infrastructure. Secondly, this must be a project that cannot be commercially successful without the city’s involvement (being important for a certain neighborhood, if not for the city at large). For instance, housing construction always pays off, even when the matter concerns very cheap projects, and we cannot allocate money from the city budget to back such projects. The city may only buy out a certain amount of residential units or lead certain engineering lines to the construction site. The first example of applying the PPP scheme to the housing and utility sector is a garbage recycling plant in Yanino, since this project anticipates the introduction of state-of-the-art technologies vitally needed by the city. The tender has already been announced: both stages will be completed in this year and an agreement with a winner will be concluded.

The main sense in using the PPP scheme for implementing any projects is the opportunity to find internal resources for cutting the costs. After the tender-winning investor makes arrangements with the city about obtaining the rate of return specified in the PPP agreement, he has a real incentive to cut ineffective expenditures and increase his profit. At the same time the PPP contract clearly specifies the quality of services provided by a private partner. Therefore the budget optimization won’t result in lower quality. The PPP mechanism can work successfully by motivating the investor to reach certain results specified in the agreement. As for state-run enterprises, including health care institutions, they lack such a motivation, since their primary specialization is the ability to kick money out the city financiers…

– Are there any plans to engage the PPP scheme as an impulse to underground development projects – in particular to the mixed-use currently constructed under Vosstaniya Square?

– We figured a tentative financial model for the construction of underground parking garages using several case studies and saw that such projects would be unprofitable in principle without substantial subsidizing – up to 60% of the project budget. The high cost of such projects (in comparison with similar projects in other countries) is explained by swampy soils in central Petersburg and the need to construct a special buttress wall. We planned on several PPP projects (parking garages under the Arts, Manege, Greek and Konyushennaya Squares with aggregated capacity of 10,000 car spaces). But the financial estimate perplexed us, since the city cannot currently afford spending 1 billion rubles plus on the construction of one underground parking garage.

Yet we are considering the backing of some specific pilot projects, such as a mixed-use project under Vosstaniya Square that has already been thoroughly elaborated. The retail space can understandably be financed only by a private investor; as for the parking, it could be jointly financed within the PPP framework.

– Have the legal issues involved in underground development been settled? I mean the right of ownership for underground spaces, in the first place, since this is very important for investors.

– Not all problems have been solved by now. The investor may get a license from Rosnedra and sign a leasehold contract for geological exploration. The next step is getting a license for underground works, other than mining of minerals, also issued by Rosnedra (its territorial office). A question then arises, whether subsoil assets belong to the city or to the federal government. There is an understanding that even if no delimitation has been done for a specific parcel, the license can be issued anyway. Registration of ownership is not a problem. Our department (CISP) agrees with GUION and KUGI that in case of underground construction real estate objects must be registered as secondary. On the one hand, land buyout is not permitted, but on the other hand, investors have the guarantee of ownership rights.

– The project of Pulkovo Airport remodeling to be delivered by the Northern Capital Air Gateway consortium (co-founded by VTB, Fraport Group and Copelouzos Group) on the basis of the PPP scheme caused “reformatting” of the Overland Express project. The decision to change the route, which will run from the Airport (rather than from Strelna) to Moscow Train Terminal, is very important for the commercial real estate market. Do you think investors will now be more interested?

– We look at the tender’s prospects with optimism. Due to the route change, we can anticipate considerable traffic, which is quite real and already exists. In April or May we’ll announce a tender for building a route from the Airport to Moscow Railroad Terminal and by late 2010 – early 2011 we’ll be able to announce a winner. The first feeder of the Light Rail System must have been completed by the end of 2013. The tender organization is simplified and the project itself is more space effective owing to the fact that the winner won’t have to organize the production of light rail stock. Hopefully we’ll finalize, concurrently with the tender, the decision to manufacture high-speed streetcars adapted to the requirements of an urban overhead and rail system and grant a respective permission to the Italian company Finmeccanica. We expect the first cars to appear in 2012. They will be tested during a year that the Express investor would be able to purchase a rolling stock from the manufacturer by late 2013, when the first terminal of remodeled Pulkovo Airport and the rail link to the Moscow Railroad Terminal (MRT) must be commissioned.

Figuring the financial model, we see the project can be profitable even without investments from the city treasury. In other words, with the existing traffic the investor’s outlay on the route and rolling stock procurement pays off at an acceptable discounting rate of about 16%. We plan on concluding a PPP agreement for 25 years, though the project may pay for itself earlier. Whether or not the investor requires the city’s financial support will become clear in the course of the tender. We suppose that even without municipal funding the tender will be interesting for those consortiums that have already passed through prequalification selection as well as for new claimants.

Talking about a return on investments, it would be logical to set two tariffs. One fare should apply to the length from Pulkovo to MRT, while the second will be a regular city charge paid by passengers who get on at one of the intermediate stations and ride a distance they need. The first will be a breakeven rate – even though the airport won’t hit a 17-million target for the human traffic anticipated towards 2017 (for now the passenger throughput is 7 million). Nevertheless the passenger traffic between the supermarkets alongside the Pulkovo Highway, business district Pulkovo-3 and the Dunaisky Ave–Bucharest St–Ligovsky Ave area reaches 60 million people per year and is set to grow in the future.

– What can you say about complex development of the territories adjoining the renovated Pulkovo Airport?

– For now we are not going to sell individual plots in the airport area. On February 15, a tender for conceptual development of 231 ha north of the airport was announced. These are vacant areas adjacent to the Pulkovo-3 business district. At the present stage we elaborate on a general concept, rather than territorial layout. We are interested in creating a complex concept of optimal land use (business park, hotels, logistics park etc) from the perspectives of a future hub and business area located in close proximity to the existing Pulkovo-2 business district. Proposals of prospective development, splitting the available land resources into lots, possible prices etc. must be prepared by October 2010. Making the tender-holding decision, we factored in successful experience in similar conceptual development for the territory between the Pulkovo Highway and the Airport provided by ARIN, the winner of last year’s tender.

– How predictable are the vistas of the WHSD (Western High Speed Diameter) project currently financed from the federal and city budgets? Are you still planning on holding a concession tender in 2011 and attracting a private investor?

– Construction on WHSD is carried on: 7.3 billion rubles is the allocation of the national treasury plus 2.6 billion rubles from the city budget. Tenders for the construction of all four legs of WHSD’s second phase to be completed in August 2011 have already been held. From November 2010, we are going to launch the operation of the finished lengths on a paid basis. Thus the project will start generating some revenue and we’ll see how the model of a paid trunk road may function. This will increase the project’s appeal to investors. It has recently been decided to change the project structure, as you probably know, and give up on the concession scheme. Chairman of the Russian cabinet Vladimir Putin signed a decree that allows OAO Western High Speed Diameter (city-owned management company) to attract bonded debt on the security of the Russian budget in the amount of 25 billion rubles over the term of up to 20 years. This is an absolutely new financial instrument never applied to PPP projects in Russia. The decree also permits investing the means accumulated in the Russian Investment Fund (using the capitalization of contribution to charter capital, rather than the concession scheme). On the other hand, this scheme will attract private financing given that private investors will be lured by public warranties. In 2011, we’ll hold a tender for drawing an investor who will complete the WHSD construction and operate this link. The city guarantees maximum profitability to the investor and it is the city, rather than the Russian Federation, who will assume the risk of providing the requisite traffic. In case the traffic falls short of the premeditated level, the city will pay a compensation for the operator to reach the preset rate of return. In our opinion, investors will be interested in this scheme. We expect the WHSD to be finished completely by 2014 under a favorable turn of events.

– When can we expect the commissioning of the Orlovsky Tunnel which may significantly improve access to Sverdlovskaya and Arsenalnaya Quays, Revolution Motorway and Piskarevsky Avenue and give an impulse to real estate development on these territories?

– The participant who came out with a competitive bid is the Nevsky Concessionary Company consortium formed by France-based Vinci, a group of companies. If the latter is proclaimed the winner of the tender, this company will have to complete the Tunnel’s construction and start its operation in 2015. Unlike the case of WHSD, we’ve kept the legal framework for this project intact and this will be a concessionary agreement. But instead of two concession grantors (RF and Saint Petersburg) only one is left and this is the city of Saint Petersburg. It is suggested that the funds of the Russian Investment Fund be transferred to the city as a subsidy and in 2011 we plan on spending this money on preparations for the construction project. During the tender we were holding an active discourse with its participants over risk sharing and reached a number of important agreements for investors. The city assumes the risks of technological connection of the object to engineering and energy infrastructure, the risk of technological relocation of water intake systems, and also part of the risks involved in having the project approved by the state examination commission.

– How about the city’s cooperation with OAO Russian Railways and its structures in relation to such major urban regeneration projects as the Moskovskaya-Tovarnaya station and the Izmailovskaya Perspektiva area?

– Last year the relocation of the freight yard at the MoskovskayaTovarnaya station to the Shushary-3 industrial area had been accomplished. To date plots of land on the cleared territories in central Petersburg have already been redeemed, shabby structures have been pulled down and preparation of the engineering outfit is under way on said grounds. Yet it’s hard to say when the project investor, namely Roregionproject Development affiliated with Russian Railways and possessing all necessary resources, starts developing this territory. For now the investor has not given us any clue about the construction commencement timeframe. Now the conceptual development and the functional purpose of real estate objects are known to be elaborated with consideration for the modified housing parameters. As regards the territories of Izmailovskaya Perspektiva, for now we can say something certain only about the project of developing the 8-ha parcel cleared from the production facilities of the Petmol plant that has been relocated. The landowner has submitted his concept that anticipates massive residential development on this territory. This concept is presently being approved by KGA.

– Do you think it feasible to “reanimate” the New Holland remodeling project and to engage new investors in its implementation?

– Certain snags presently impede implementation of this project in its original format, in spite of the city and investor’s willingness to bring this matter to fruition. As you probably know, 50% of the shares owned by Shalva Chigirinsky’s ST Development, the investor, have been distrained or seized. In this connection the city is contemplating the announcement of a new tender for remodeling of the New Holland Island in summer 2010. It’s premature to talk of the tender’s terms, since the decision is to be made both at the level of Saint Petersburg and at the level of the Russian Federation. We’ve already started preparations, though, and are engaged in market valuation of the object and its inventory, keeping in touch with the project co-investor – Mercury Development. Given that considerable investments have already been made, the company has the intention to actively participate in the new tender.

– How do you assess the current state of the Apraksin Dvor renovation project and the odds of reaching understanding between the city and investors and between Glavstroy-SPb and real estate owners?

– The project is carried forward albeit at a slower pace than was originally planned. To date about 25,000 sq m of municipal immovable property out of 76,000 sq m have already been handed over to the investor. The city has almost negotiated an agreement with one of the investors (Okhta-Group) and an amicable settlement is looming up. There is also some progress with other landlords – we’ve resumed the process launched 2-3 years ago, when we were looking for objects in other parts of the city to recompense the investors of Apraksin Dvor. Now as real estate prices have dropped, the landowners will hopefully be more flexible. Meanwhile Glavstroy-SPb is discussing with the landlords their possible mutual involvement in the project. The strategic investor considers this collaboration option, although someone should make the first step in this matter and name the price and other terms. At one of our recent consultations in relation to the project implementation we made an arrangement with Glavstroy-SPb that the company forward the owners of real estate in Apraksin Dvor its proposals concerning their mutual participation in the project. Let’s wait for a reply from the landowners…

Summary

Alexei Chichkanov appointed in late 2009 Chairman of Saint Petersburg Committee for Investments and Strategic Projects (CISP) gained rich experience in state-owned property management. From 1995 to June 2008 Mr. Chichkanov worked for KUGI and in recent years he has been Vice-Chairman of the Committee. In this capacity he was engaged in legal and ownership issues related to implementation of strategic investment projects in the city on the Neva. For slightly more than a year Alexei was partner of the well-known law firm DLA Piper, but later accepted the governor’s proposal to helm CISP.